The value of commercial property appreciated by 15 per cent last year driven by a higher preference by business owners to buy property than rent out, outshining returns for residential houses where values remained flat.

A research by Stanbic Investment Management Services (SIMS) indicates that selling prices closed 2011 at an average cost of Sh15,000 per square foot compared to Sh13, 000 per square foot in January.

The gains place commercial property as a leading asset class for investors in a year when valuations of homes remained depressed — while the stock market lost about a third of its value.

“Developers of upcoming buildings have adjusted offer prices to about Sh15,000 per square foot on representing a 15 per cent escalation,” said Anthony Mwithiga, the chief investments officer at SIMS.

Mr Mwithiga says that research had shown that professionals including lawyers and doctors, academic institutions and pension funds were the main buyers of commercial space.

Knight Frank, a property manager, recorded a more modest 14 per cent rise on the selling prices of new office blocks at Sh16,000 per square foot in the emerging business districts of Westlands, Upper Hill and Ngong Road.

SIMS attributed the higher valuations on office space mainly to developers taking advantage of the hype associated with owning office spaces — which is a relatively new concept in the Kenyan property market.

“The real reason developers are quoting premium prices is because it is still viewed as a prestigious thing for these buyers to own the offices they operate from,” said Mr Mwithiga

“It is obvious though that there is rising demand by companies to run from own premises rather let but the demand alone has not exceeded supply,” he added.

Even as the prices rose steadily through the year, rental prices on commercial property remained depressed below the Sh100 per square foot per month —even in the highest grade of office spaces in the best locations.

But what perhaps best explains the strong preference for buying is the availability of letting commercial space in the market.

SIMS projected low occupancy this year due to the tough economic conditions.

“There is a glut of un-let good quality office space in the market, and we expect the available space to stay un-let for a while due to the tough macro-economic conditions,” said SIMS in investment report for the fourth quarter of last year.

Mr Ben Woodhams, the managing director at Knight Frank cites a rising demand as the key driver for the higher selling prices, saying even businesses are opting to buy their own premises than remain tenants.

He pointed out Westlands as the most attractive business district for enterprises seeking to acquire offices during 2011 though the actual selling prices reported were higher throughout the market.

“It is only in the last quarter that we saw some significant slowing down in transactions but the prices held steady,” said Mr Woodhams.

“Even with significantly fewer transactions in the fourth quarter, we believe most potential buyers only postponed their decisions owing to higher interest rates,” he added.

Knight Frank had as early as the beginning of last year indicated to an oversupply in the glut in the rentals market for commercial buildings, projecting that developers were adding over two million square feet of office space every year till 2014.

Another real estate firm, CB Richard Ellis, projects a glut in the commercial property market, with the oversupply anticipated to ease after 2011’s peak of 2.3 million square feet of lettable office space going forward.

SIMS expects a slowdown in the construction sector as developers cut back on their planned investments owing to high interest rate environment.